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FULL OF SCRAP Aleris, e-auctions and the local sheriff? The ties that bind

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The scrap industry is losing some of its human flavor as bazaar-style haggling becomes a breach of norms, digital auctions at computer terminals become more common and law enforcement's needs create gigabytes of transaction records.

The evaporation of Wabash Alloys LLC into Aleris International Inc. is part of the shift. Aleris, in existence for three years, has become the No. 1 U.S. secondary smelter group in aluminum. Its corporate style, even before reaching the top, has been to act decisively with little patience for dickering.

Paul Schaffer

Aleris stations all its scrap buyers at headquarters, not at the smelters and sheet mills receiving the shipments. "The Aleris folks are much more disciplined in their approach to pricing," one scrap manager said. "There's a little bit more play with the other guys—more back and forth with Wabash and some of the other smelters—than with Aleris."

And Aleris' shopping lists reputedly are written in stone in terms of quantity and grades of scrap. Before Aleris took charge, "we could call (the Michigan smelter in) Coldwater with five, six, seven items I want to sell. What's your price on borings, what's your price on this, and make deals predicated on those items," one seller said. "Now they make the call and you have to be ready to supply whatever it is they want." There's no longer room for the seller to influence which grades will go into a particular shipment, he added.

Some smelters can be lobbied to use a yard's exotic scrap grades as an input to short runs of exotic alloys, another scrap manager said, but Aleris' management style doesn't allow for that sort of influence.

A different sort of impediment to idiosyncratic dealmaking is sales via Web auctions. Discarded metals at domestic military bases, for example, are now marketed through the Internet, grossing $55.3 million in the 12 months ended June 30. The bid screens for every available lot can be viewed in real time from anywhere. Registered bidders get instant feedback on the latest top offer and can increase their previous bids over a period of several days.

Most of the time, the U.S. Defense Department auctions are for material already accumulated, available for immediate pickup at a specific military base. Occasionally, the Defense Department auctions a lot expected to be generated over the next 12 months at a particular location.

Before the advent of military Web auctions, the typical arrangement was for scrap processors near a base to submit annual bids, with escalator clauses pegged to a price in AMM or some other publication. The nationwide Web auctioneer, Government Liquidation LLC, Scottsdale, Ariz., almost never includes escalator clauses in its auction arrangements.

Gilbert, who sells electric motor scrap to Asian markets, told a magazine interviewer that online scrap auctions "impersonalize the industry and create a price-driven race to the bottom. I think the process cheapens our business because it doesn't nurture long-term relationships or give parties the opportunity to deal."

Pinkert wrote a rebuttal defending auctions as a pricing tool suitable for companies with robust relationships, not just for those wary of unfamiliar traders. Unlike the Defense Department's scrap auctions, those run by Pinkert's company can be configured to restrict the list of potential bidders. They also can allow the seller to close the deal with a buyer who isn't the highest bidder.

One ingenious option at ScrapSite offers an arena that emulates how people haggle by limiting the precision of the feedback. That method, which is called a "ranked sealed-bid auction," doesn't disclose the latest high bid to potential buyers. During the auction, the top three bidders are informed electronically how they rank, while the others are told that they are bringing up the rear. Based on that information, potential buyers must choose whether and how much to increase their previous bids.

The erosion of informal buyer-seller ties in the scrap business is also manifest in the stringent regulation of "over the scale" transactions in many jurisdictions designed to detect stolen property.

Local ordinances and state laws increasingly require extensive identification from peddlers bringing in scrap. Sometimes fingerprints are required, and sometimes there are payment conditions that simplify tracking the seller later on if police wish to do so. Buyers needn't take their shoes off for inspection, but otherwise a scrap purchase counter can feel like an airport departure terminal these days.

An Arizona law that took effect Aug. 31 requires scrapyards' purchase records to include photos of the scrap and the seller, along with a thumbprint. Payment for some types of transactions must be by check through the mail.

Columbus, Ohio, passed an ordinance in July requiring thumbprints. Eventually, yards will have to supply daily electronic reports of their transactions to police or else hold material for seven days.

Detroit now requires special permits for vehicles used to gather scrap, even if the driver doesn't have a formal recycling business.

A California scrapyard, Bruno's Iron & Metal Co., is resisting one recent ordinance in court. "Fresno County cannot unilaterally set aside the legal right of four businesses to pay their debts in cash," the recycler contends.

California scrapyards, lobbying at the state level, came up with an inventive provision to ease the burden on their most active peddlers. A peddler would be treated similarly to a corporate scrap source in terms of identification and payments if he had dealings with the yard five or more times a month for three consecutive months. That provision made it into a compromise bill, but the coalition backing the proposal eventually fell apart. The California Farm Bureau Federation instead urged local governments to enact their own ordinances on what precautions scrapyards should take against stolen property.

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